BEHIND THE ECONOCATACLYSM
Globalization, Oil Shock and the Iraq War
by Vilosh Vinograd, World War 4 Report
On Sept. 29—perhaps to be remembered as Black Monday—a majority of House Republicans, and a minority of Democrats, voted down the $700 billion bailout bill. The stock market reacted with the first one-day trillion-dollar loss in Wall Street history—an 8.8% free fall, its biggest percentage decline since the 1987 crash. Only one stock in the index—Campbell Soup—finished higher.
Even the supposed pillars of stability which seemed poised to reap the gains of the recent turmoil were not immune. JP Morgan Chase—which had already acquired Bear Stearns investment bank and Washington Mutual savings & loan, with US tax-payers sweetening the deals to the tune of billions—closed $7.24 lower at $41, down 15 percent. Citigroup—the country's largest banking institution, with JP Morgan in the number-two slot—was poised to acquire the banking assets of Wachovia Corp. in the big reshuffle. Wachovia lost more than 90% of its market value in the plunge. Bank of America—set to acquire Merrill Lynch—announced it was suing affiliates of the newly bankrupt Lehman Brothers for $500 million for failure to return money the bank provided as collateral. Global financier George Soros says the "global capitalist system... is...coming apart at the seams."
Up to $3 trillion in financial assets have been wiped out in the crisis so far—and supposed free-market principles are being abandoned for a rapid centralization of power in federal hands to shore up the teetering edifice, a virtual melding of Wall Street and Washington. The Philippine radical academic Walden Bello writes in a primer on the crisis:
Wall Street [is] effectively nationalized, with the Federal Reserve and the Treasury Department making all the major strategic decisions in the financial sector and, with the rescue of the American International Group (AIG), the US government now runs the world's biggest insurance company.
The bailout plan, drawn up by Treasury Secretary Hank Paulson, is dubbed the Troubled Asset Relief Program (TARP), and is the centerpiece of the proposed Emergency Economic Stabilization Act. It would give Paulson or his successor unprecedented powers. Under the plan, any firm selling assets to the government would have to give Washington the right to take an ownership stake in the firm. It would give the Treasury Secretary similar powers to cut deals with foreign banks. The left is concerned that the bill would bail out Wall Street but not "Main Street"—and even Republicans have had to adopt this rhetoric. For the right it is an embarrassment: a crash reversal of the long-repeated mantra that the "free market" would solve all problems. After a generation of neoliberal dogma and corporate globalization, these supposedly sacred principles are being abandoned by the administration with a vertiginous rapidity.
Globalization: the God that Failed
On the surface, the crisis is the bitter fruit of frenzied speculation and labyrinthine trickery—the endless artifice of Wall Street whiz-kids to keep milking profit out of bad debts. Writes Bello:
Financial speculators outsmarted themselves by creating more and more complex financial contracts like derivatives that would securitize and make money from all forms of risk—including exotic futures instruments as "credit default swaps" that enable investors to bet on the odds that the banks' own corporate borrowers would not be able to pay their debts! This is the unregulated multitrillion dollar trade that brought down AIG.
And, in what Bello portrays as a vicious cycle, the deregulation ethic which led to the current crisis was itself a response to the deeper underlying crisis of capitalism:
The Wall Street meltdown is not only due to greed and to the lack of government regulation of a hyperactive sector. The Wall Street collapse stems ultimately from the crisis of overproduction that has plagued global capitalism since the mid-seventies.
Financialization of investment activity has been one of the escape routes from stagnation, the other two being neoliberal restructuring and globalization. With neoliberal restructuring and globalization providing limited relief, financialization became attractive as a mechanism to shore up profitability. But financialization has proven to be a dangerous road, leading to speculative bubbles that lead to the temporary prosperity of a few but which ultimately end up in corporate collapse and in recession in the real economy.
Deregulation was part of the general neoliberal doctrine:
Neoliberal restructuring took the form of Reaganism and Thatcherism in the North and Structural Adjustment in the South. The aim was to invigorate capital accumulation, and this was to be done by 1) removing state constraints on the growth, use, and flow of capital and wealth; and 2) redistribute income from the poor and middle classes to the rich on the theory that the rich would then be motivated to invest and reignite economic growth.
The problem with this formula was that in redistributing income to the rich, you were gutting the incomes of the poor and middle classes, thus restricting demand, while not necessarily inducing the rich to invest more in production.
Next was the move to open new markets and resources in the process to become known as globalization:
The second escape route global capital took to counter stagnation was "extensive accumulation" or globalization, or the rapid integration of semi-capitalist, non-capitalist, or precapitalist areas into the global market economy. Rosa Luxemburg, the famous German revolutionary economist, saw this long ago as necessary to shore up the rate of profit in the metropolitan economies. How? By gaining access to cheap labor, by gaining new, albeit limited, markets, by gaining new sources of cheap agricultural and raw material products, and by bringing into being new areas for investment in infrastructure. Integration is accomplished via trade liberalization, removing barriers to the mobility of global capital, and abolishing barriers to foreign investment.
China is, of course, the most prominent case of a non-capitalist area to be integrated into the global capitalist economy over the last 25 years.
To counter their declining profits, a sizable number of the Fortune 500 corporations have moved a significant part of their operations to China to take advantage of the so-called "China Price"—the cost advantage deriving from China's seemingly inexhaustible cheap labor. By the middle of the first decade of the 21st century, roughly 40 to 50 per cent of the profits of US corporations were derived from their operations and sales abroad, especially China.
One ironic fruit of this strategy is the emergence of Asia and particularly China in a position of (limited) power over the US. Writes Bello in an analysis of Asia's role in the current crisis:
Trillions of dollars of Asian public and private money are invested in US firms and property, with the five biggest Asian holders accounting for over half of all foreign investment in US government debt instruments. Funds from Asia have become a key prop of US government spending and the middle-class consumption that have become the driver of the American economy.
Singapore's Temasek pumped over $4 billion into Merrill Lynch a few months ago—after driving a hard bargain. The China Investment Corporation (CIC) invested $5 billion in Morgan Stanley last December, but refused the crippled investment bank's desperate plea to increase its share of the firm. The Korean Development Bank turned down the overtures of Lehman Brothers a week before the latter's historic collapse into bankruptcy.
China is not likely to call in the chips any time soon:
With so much of Asia's wealth relying on the stability of the US economy, there is not likely to be any precipitate move to abandon Wall Street securities and US Treasury bills.
Nonetheless, faced with this vulnerability vis-a-vis Asia and especially China, the US under George Bush embarked on reckless gambit to shore up unrivaled global hegemony—using its still unparalleled military supremacy to acquire strategic control of the world's most critical oil reserves in the Persian Gulf.
Over the Edge: It's the War, Stupid!
The financial crisis was brewing anyway, but the Iraq war and resultant oil shock helped preciptate it. Writing in The Guardian earlier this year, Nobel-prize winning economist Joseph Stiglitz found:
Underlying the US's financial woes are three distinct but related problems. First, a debt crisis, exemplified by sub-prime mortgages, with millions of Americans with mortgages greater than the value of their house.
Second, with so many bad debts, and such uncertainty about their magnitude, there is a credit crunch. Banks don't even know the extent of their own problems; how then can they have much confidence in lending to others?...
The third problem is macro-economic. The US has been sustained by a housing bubble, leading to a consumer binge. Household savings rates have fallen to zero. The Iraq war—and the soaring oil prices accompanying it—has depressed the economy. Money spent on oil or on Nepalese contractors in Iraq is money that isn't being spent at home; these dollars don't provide much stimulation for the economy.
Writing with Harvard's Linda J. Bilmes in the Washington Post in March, Stiglitz sounded a similar warning:
There is no such thing as a free lunch, and there is no such thing as a free war. The Iraq adventure has seriously weakened the US economy, whose woes now go far beyond loose mortgage lending. You can't spend $3 trillion—yes, $3 trillion—on a failed war abroad and not feel the pain at home.
Some people will scoff at that number, but we've done the math. Senior Bush administration aides certainly pooh-poohed worrisome estimates in the run-up to the war. Former White House economic adviser Lawrence Lindsey reckoned that the conflict would cost $100 billion to $200 billion; Defense Secretary Donald H. Rumsfeld later called his estimate "baloney." Administration officials insisted that the costs would be more like $50 billion to $60 billion. In April 2003, Andrew S. Natsios, the thoughtful head of the US Agency for International Development, said on Nightline that reconstructing Iraq would cost the American taxpayer just $1.7 billion. Ted Koppel, in disbelief, pressed Natsios on the question, but Natsios stuck to his guns. Others in the administration, such as Deputy Defense Secretary Paul D. Wolfowitz, hoped that US partners would chip in, as they had in the 1991 Persian Gulf War, or that Iraq's oil would pay for the damages.
The end result of all this wishful thinking? As we approach the fifth anniversary of the invasion, Iraq is not only the second longest war in US history (after Vietnam), it is also the second most costly—surpassed only by World War II.
Why doesn't the public understand the staggering scale of our expenditures? In part because the administration talks only about the upfront costs, which are mostly handled by emergency appropriations. (Iraq funding is apparently still an emergency five years after the war began.) These costs, by our calculations, are now running at $12 billion a month—$16 billion if you include Afghanistan. By the time you add in the costs hidden in the defense budget, the money we'll have to spend to help future veterans, and money to refurbish a military whose equipment and materiel have been greatly depleted, the total tab to the federal government will almost surely exceed $1.5 trillion.
But the costs to our society and economy are far greater. When a young soldier is killed in Iraq or Afghanistan, his or her family will receive a US government check for just $500,000 (combining life insurance with a "death gratuity")—far less than the typical amount paid by insurance companies for the death of a young person in a car accident. The stark "budgetary cost" of $500,000 is clearly only a fraction of the total cost society pays for the loss of life—and no one can ever really compensate the families. Moreover, disability pay seldom provides adequate compensation for wounded troops or their families. Indeed, in one out of five cases of seriously injured soldiers, someone in their family has to give up a job to take care of them.
But beyond this is the cost to the already sputtering US economy. All told, the bill for the Iraq war is likely to top $3 trillion. And that's a conservative estimate.
And all of this has been exacerbated by the oil shock, which is in large part also a fruit of the war:
Another worry: This war has been particularly hard on the economy because it led to a spike in oil prices. Before the 2003 invasion, oil cost less than $25 a barrel, and futures markets expected it to remain around there. (Yes, China and India were growing by leaps and bounds, but cheap supplies from the Middle East were expected to meet their demands.) The war changed that equation, and oil prices recently topped $100 per barrel.
While Washington has been spending well beyond its means, others have been saving—including the oil-rich countries that, like the oil companies, have been among the few winners of this war. No wonder, then, that China, Singapore and many Persian Gulf emirates have become lenders of last resort for troubled Wall Street banks, plowing in billions of dollars to shore up Citigroup, Merrill Lynch and other firms that burned their fingers on subprime mortgages. How long will it be before the huge sovereign wealth funds controlled by these countries begin buying up large shares of other US assets?
The Bush team, then, is not merely handing over the war to the next administration; it is also bequeathing deep economic problems that have been seriously exacerbated by reckless war financing. We face an economic downturn that's likely to be the worst in more than a quarter-century.
In a classic case of imperial overstretch, the stratagem to extend global supremacy may prove to have backfired horribly.
John McCain: Bogus Populist
Both Republican presidential candidate John McCain and his Democratic challenger Barack Obama loaned what the Washington Post called "cautious support" for the TARP. But McCain, sensing he is weak on the suddenly critical issue (having notoriously stated as recently as Sept. 15 that the "fundamentals of the economy are strong"), made a show of getting involved in the bailout negotiations. But his abrupt conversion from the deregulation dogma strikes many as hollow. Writing in Newsweek, Daniel Gross argues that "The Republicans killed the bailout bill—and McCain's chances." He mocks:
Sen. John McCain, who interrupted his campaign to deal with the crisis, claimed—via his surrogates—that he wielded great influence in improving the deal and making it palatable. Then he left town as it collapsed.
More scathing still is Rosa Brooks in the Washington Post, who points out that McCain connived with (illegal) financial shenanigans:
Once upon a time, a politician took campaign contributions and favors from a friendly constituent who happened to run a savings and loan association. The contributions were generous: They came to about $200,000 in today's dollars, and on top of that there were several free vacations for the politician and his family, along with private jet trips and other perks. The politician voted repeatedly against congressional efforts to tighten regulation of S&Ls, and in 1987, when he learned that his constituent's S&L was the target of a federal investigation, he met with regulators in an effort to get them to back off.
That politician was John McCain, and his generous friend was Charles Keating, head of Lincoln Savings & Loan. While he was courting McCain and other senators and urging them to oppose tougher regulation of S&Ls, Keating was also investing his depositors' federally insured savings in risky ventures. When those lost money, Keating tried to hide the losses from regulators by inducing his customers to switch from insured accounts to uninsured (and worthless) bonds issued by Lincoln's near-bankrupt parent company. In 1989, it went belly up—and more than 20,000 Lincoln customers saw their savings vanish.
Keating went to prison, and McCain's Senate career almost ended. Together with the rest of the so-called Keating Five—Sens. Alan Cranston (D-Calif.), John Glenn (D-Ohio), Don Riegle (D-Mich.) and Dennis DeConcini (D-Ariz.), all of whom had also accepted large donations from Keating and intervened on his behalf—McCain was investigated by the Senate Ethics Committee and ultimately reprimanded for "poor judgment."
But the savings and loan crisis mushroomed. Eventually, the government spent about $125 billion in taxpayer dollars to bail out hundreds of failed S&Ls that, like Keating's, fell victim to a combination of private-sector greed and the "poor judgment" of politicians like McCain.
Barack Obama: the Post-Petrol FDR?
Obama has been quick to play Franklin Delano Roosevelt to Bush/McCain's Herbert Hoover. As the House rejected the TARP on Sept. 29, he told supporters in Colorado that McCain has "fought against commonsense regulations for decades, he's called for less regulation 20 times just this year, and he said in a recent interview that he thought deregulation has actually helped grow our economy."
"Senator, what economy are you talking about?" Obama asked.
That same day he told a rally in downtown Detroit: "You can't make up for 26 years in 26 days. For most of the 26 years, he's been against the common-sense rules and regulations that could have stopped this problem."
Daniel Gross in Newsweek concludes:
In general, I've found a lot of the analogies between the present situation and the Great Depression to be way off. But there's one area in which the analogy might hold true. Just as happened in 1932, it's possible that the Republicans' incompetence and bullheadedness in managing a financial crisis could lead to Democrats controlling both the White House and Congress.
But after nearly a generation of bipartisan consensus on deregulation and "free markets," it remains to be seen if Obama and the Democrats will rise to the mandate of history as FDR did—in the face of relentless opposition from conservatives—even if they make it into office. And while FDR inherited an isolationist America wary of foreign entanglements, Obama will find himself at the reins of a global military leviathan with tentacles hopelessly entangled in Iraq and Afghanistan. Cutting down the leviathan—anathema to the long-reigning bipartisan consensus on global empire—could be his greatest challenge, and one with a vital and little-appreciated link to staving off the impending financial collapse. The resources and human energy that FDR finally marshaled for the war effort, Obama will have to marshal for a crash conversion from the oil economy and a return to self-sufficiency, localization and the human scale. With luck, we will soon see whether or not the Democratic party is capable of breaking with—and standing up to—corporate power on addressing the fundamental contradictions that underlie the current crisis.
"Paulson Will Have No Peer" Peter G. Gosselin, Los Angeles Times, Sept. 29
"The $700 Billion Bailout's Fine Print" by Nomi Prins, Mother Jones, Sept. 24
"Washington to Wall Street: Drop Dead" by Daniel Gross, Newsweek, Sept. 29
"Obama and McCain Express Cautious Support for Bailout" by Michael Shear,
Washington Post, Sept. 29
"A Primer on the Wall Street Meltdown" by Walden Bello
Focus on the Global South, Sept. 25
"The Wall Street Meltdown: the View from Asia" by Walden Bello
Focus on the Global South, Sept. 24
"A Deficit of Leadership" by Joseph Stiglitz, The Guardian, April 8
"The Iraq War Will Cost Us $3 Trillion, and Much More" by Linda J. Bilmes and Joseph Stiglitz
The Washington Post, March 9
"Iraq war 'caused slowdown in the US'" by Peter Wilson, The Austrlian, Feb. 28
"Keating 5 ring a bell?" by Rosa Brooks, Los Angeles Times, Sept. 25
OIL SHOCK REDUX
Is OPEC the Real Cartel —or the Transnationals?
by Vilosh Vinograd, WW4 Report
From our Daily Report:
Latin America: markets react to financial crisis
WW4 Report, Sept. 25, 2008
Special to World War 4 Report, Sept. 1, 2008
Reprinting permissible with attribution